CPEC: A Corridor of Opportunities

Twenty-first century economies are increasingly interlinked and there exists an ongoing shift in global economic activity from developed to developing countries. These linkages need to be strengthened by facilitating economic clusters around important transport corridors that link global production networks, otherwise called “economic corridors” – one of the important means to facilitate economic activity and trade. In 2013, China’s President, Xi Jinping, proposed establishment of economic corridors linking China with Central Asia, West Asia and parts of South Asia called the “One Belt One Road (OBOR)” initiative. Under OBOR, CPEC is part of the larger umbrella and aims at providing a new corridor of trade for China and Pakistan and is expected to benefit the whole of South Asian region. CPEC, a $51 billion project, is an economic corridor comprising a set of projects in energy, road, railway and fibre optics and will open doors to economic opportunities not only to Pakistan but will physically connect China to its markets in Asia, Europe and beyond. The project is expected to add 2 to 2.5 percent to the annual economic growth of Pakistan. Also, it is forecast to add 2 million direct and indirect jobs to Pakistan’s economy between 2015-2030. There is a fair division of projects between the four provinces of Pakistan: 16 in Baluchistan, 8 in KPK, 13 in Sindh and 12 in Punjab. Three routes have been earmarked for CPEC, the Western, Central and Eastern routes. The distribution of the corridor along three routes allows for access through all the four provinces. This geographical spread of the corridor will provide economic benefits to all provinces with direct and indirect job creation possibilities arising.
Pakistan’s economy has tremendous strategic development potential, as it is located at the crossroads of South Asia, Central Asia, China and the Middle East and thus can serve at the fulcrum of a regional market with a vast population, large and diverse resources, and untapped potential for trade. The major obstacles faced by Pakistan’s economy include persistent industrial losses due to energy crisis, low foreign direct investment, lack of infrastructure development, losses due to war on terror and low exports and high imports. The average shortfall in the power sector is 4,500 megawatts, and nearly two billion cubic feet per day in the natural gas sector. This chronic power shortage, in the form of load-shedding and power outage, cost the Pakistan economy PKR 1,439 Billion (7 percent of GDP) in 2015. Major industries have seen a downward slump in business because of being curtailed by energy shortage. Under CPEC, a grand total of 21 energy projects have been planned. Altogether, these projects would eventually produce 16,400 megawatts of power, roughly the same as Pakistan’s current capacity. Also, 14 Chinese constructed energy projects in Pakistan tied to the CPEC are expected to provide an additional 10,400 megawatts of electricity by March 2018 – more than sufficient to make up for Pakistan’s 2015 energy shortfall of 4,500 megawatts.
One of CPEC’s primary objectives is to look to address pressing infrastructural requirements of Pakistan. With nearly $11 billion earmarked for infrastructure development the road and railway network will greatly benefit Pakistan’s economy. The road infrastructure will see development along Khuzdar-Basima Highway, Karakoram Highway II, Karachi Lahore Motorway and other projects. These development projects will enhance the connectivity between all four provinces and allow for ease of access of goods. Pakistan Railways is set to attract up to $5 billion investment for the purpose of upgradation and deployment of new railways infrastructure across Pakistan. To enhance connectivity and improve transportation facilities upgradation of 1,872 kilometer track from Karachi to Peshawar will be carried out. Other projects for the railway infrastructure include 1,254 km of railway track from Kotri to Attock city that will be upgraded.
Special Economic Zones Special Economic Zones (SEZ) are specialized zones with specific types of enterprises operating in a well-defined geographic area where certain economic activities are promoted by a set of policy. The SEZ’s are not just centralized in just one province, instead there are more SEZ’s planned in provinces in pre-development stage. Khyber Pakhtunkhwa will have the highest number of economic zones, eight, compared to three in Sindh. Baluchistan and Punjab will have seven such economic zones each. The first special economic zone has been set-up by the Khyber Pakhtunkhwa government at Hattar with the aim to attract close to Rs 300 bn of investment inflows over the period 2016-2021. The special economic zones are targeting sectors like food, pharmaceuticals, engineering, auto and food packaging. In Baluchistan, the SEZs are planned to be set-up in Gwadar, Lasbela Industrial Estate, Turbat Industrial Estate, Dera Murad Jamali Industrial Estate, Winder Industrial and Trading Estate, Mini Industrial Estate and Bostan Industrial Estate. The three SEZ in Sindh would include an exclusive Chinese Industrial Estate near Karachi, Textile City near Port Qasim and Marble City Karachi. Once implemented, these SEZ’s will be able to enhance the country’s productive capacity, expand its export base and help in import substitution; and provide a major impetus for economic and social development through their backward and forward linkages with the rest of the domestic economy. These SEZ’s have the potential to be a turning point for the industrial sector in the country, as economic zones have played a key role in the industrial development in many Asian countries. Previously, Pakistan has been lagging behind other South Asian countries in utilizing SEZ benefits.
Enhanced energy supply:
Over 140 million Pakistanis either have no access to the existing power grid network or suffer from 12 hours of load shedding daily. Pakistanis who do not have access to the grid are often poorer than those on the grid. Meanwhile, household electricity consumption has grown at an annual growth rate of 10 percent. Up to 500,000 households are impacted with unemployment as businesses have been forced to shut down due to energy shortage. Nearly PKR 30 billion is the approximate expenditure by Pakistani households on UPS and battery charges alone. Given this context nearly $34 billion of investment under CPEC in the energy sector is expected to be arranged by private consortia to help alleviate Pakistan’s chronic energy shortage, which regularly amount to over 4500 MW and has shed an estimated 2-2.5% off Pakistan’s annual gross domestic product. This investment includes the Quaid-i-Azam Solar Park in Bahawalpur, Jhimper Wind Energy Park, Suki Kinari Hydropower project and Kohala Hydropower project.
Growth potential in stock exchange:
Investment-led growth in GDP would augment volumes and earnings of Cement and Steel companies while higher income levels and improved energy availability would help the manufacturing sector through higher demand and cheaper and secure energy supplies. Banks would witness accelerated balance sheet growth and a higher share of lending in the asset mix which will likely augment New Issue Market. Consumer stocks would also benefit from the higher demand and income levels.
Reinforce export of fruit:
The region of Gilgit-Baltistan is known for its fresh fruit exports, like cherries, apricots and apples. CPEC will be a game changer by opening business opportunities for the region’s traders. With an estimated production of 4,000 tonnes of cherries and up to 20,000 tons of apples every year, the region has potential to tap into the Chinese market.
Foothold in manufacturing sector:
The Chinese consumer market is in the midst of a transformation which offers new opportunities for Pakistan’s businesses. Three forces are ushering in the transformation: rise of upper middle class, a generation of free spenders and increasingly powerful role of e-commerce. It is expected that with growing income Chinese society will get more consumer centric. The burgeoning Chinese middle-class demand for wide range of products at affordable prices is expected to increase. It is projected that in the near future China will make a move up the value chain in manufacturing sector, so while cornering the high-tech manufacturing services like pharmaceuticals, air and space craft and technology for itself, it will outsource medium to low-technology manufacturing activities like food, textile, paper and leather to cheap labour centric countries. With CPEC under development, Pakistan will have the opportunity to be a beneficiary of China’s largesse. China plans to shift parts of its $300 billion textile to Pakistan for which industrial zones are being identified by both countries. If adequate government level attention is given to Chinese interests then these opportunities would support Pakistan’s manufacturing sector.